Is it Legal to Trade Forex?

The foreign currency exchange (Forex) market is open 24 hours a day, 5 days a week across the globe. The New York session is significant and tends to have a marked impact on fluctuations in the market, which makes it interesting to note the low number of US based retail traders. Before we look into reasons why this is, it is important to note that it is legal to trade Forex in the United States. However, there are regulations in place that certainly impact the number of traders that there are in the US and which encourage many US traders to give up trading. Here we will look at these regulations and try to better understand the current situation in the US.

US Regulations for Forex Brokers

Up until 2008, there were no regulations at all for Forex brokers, but this changed with the 2008 Farm Bill. Then, as a response to the global financial crisis, came the Dodd-Frank Wall Street Reform Act of 2010. When the two official regulation bodies were established, Forex trading became even more tightly regulated. These 2 bodies include:

National Futures Association (NFA) – This was the first official body to give licenses and permissions to Forex brokers in the US. It has set the obligatory standards for US Forex brokers.

Commodities Futures Trading Commission (CFTC) – The aim of the commission is to ensure competitiveness, financial stability and transparency within the industry. It promotes the integrity of the market and works to prevent abuse or violations.

Obtaining Licenses

It is possible for brokers to hold multiple licenses. For example, if a broker obtains a license from a European regulator, it can then accept traders from all EU countries without much difficulty. This means that a broker that is regulated in Germany, can accept traders from other EU member states, such as the Netherlands and Bulgaria. However, this is not so simple when it comes to traders from the US. For a broker to accept traders from the US, they must be regulated by the NFA and this may not be so simple. This is largely because the capital requirements are typically higher than those for a European license to the point that it may preclude many brokers.

Costs

Under the Dodd-Frank Act, enforced by the CFTC, Forex brokers in the US are required to maintain at least $20 million in capital. This can be compared to the requirement in Cyprus which ranges from EUR40,000 to EUR1,000,000. Not only is it much less expensive, but those with a license in Cyprus can provide Forex services to traders in other EU countries.

The Bottom Line

It is certainly legal to trade Forex in the United States, but the licensing requirements and regulations have made it far more expensive and complicated for brokers in the US than in other places around the world. However, there is talk in the US of the Trump administration lightening regulations and this could result in some significant changes in the industry.